Related and Interested PartiesBy Cindy McGiffin, Senior

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UHY LLP provides solut ions to nonprof i t f i rmsin account ing, tax and consult ing.

FASB Excludes AllNonprofits fromPublic BusinessEntity DefinitionBy Suesan Patton,Director of Quality Initiative

The FinancialAccountingS t a n d a r d sBoard (FASB)agreed in De-cember 2013,that a publicbusiness en-tity is an en-

tity that meets any one of the sixcriteria delineated in its Account-ing Standards Update (ASU) 2013-12, Definition of a Public BusinessEntity. Although not-for-profitsmay sometimes meet one of thesesix criteria, the ASU specificallystates that, Neither a not-for-profit entity nor an employee ben-efit plan is a business entity.Not-for-profits are defined, andtheir accounting requirements areaddressed, in FASB ASC Section958, Not-for-Profit Entities.

This definition of public businessentity will be used by three organ-izationsthe FASB itself, its Emerg-

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the next level of service For more information,please contact Jennine Andersonat janderson@uhy-us.com

NonprofitInsiderJune 2014 Vol. 5 No. 3

sidiary) or common control underandwith another entity (brother/sis-ter). For this purpose, control meanshaving the power to remove and re-place a majority of another organi-zations directors or a majority of themembers who elect the directors.Control in either direction creates re-lated parties. To understand betterthis issue of control, the questions toask are these

Are a majority of your NFPs direc-tors being elected by the potentiallyrelated organization?

Are a majority of your NFPs direc-tors comprised of individuals con-nected to the potentially relatedorganization as its directors, officers,employees or agents?

Control in either direction creates re-lated parties; for example, anotherentity electing a majority of yourNFPs directors or your NFP electing amajority of another entitys directors.Control can also be direct or indirect.For example: NFP #1 appoints theboard of NFP #2. NFP #2 appoints theboard of NFP #3. NFPs #1 and #2 arerelated parties (directly); #2 and #3are related parties (directly); and #1and #3 are related parties (indirectly).

When prepar-ing a Form990, one of thefirst steps to takeshould be identi-fying what arecalled related or-ganizations andinterested par-

ties. These relationships come intoplay on various parts and schedules ofthe 990, so its helpful to identify themearly in the process.

Related OrganizationsBy definition, a related organizationis any entity that has one of the fol-lowing relationships with your not-forprofit (NFP) organization: parent, sub-sidiary, brother/sister, supporting[509(a)(3)], supported [509(a)(1) or509(a)(2)], and a few associations re-lated to voluntary employee benefici-ary association plans, or VEBAs.

These related organizations could benot-for-profits, corporations, part-nerships, trusts or government units.In determining when your NFP is in aparent, subsidiary, or brother/sisterrelationship with another entity, thekey is control: control by your NFP(parent), control of your NFP (sub-

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When related parties exist, they arereported on the 990s supplementalSchedule R. In addition to naming therelated parties, certain transactionswith related parties must be disclosed.These are detailed in the instructionsto Schedule R.

Interested PartiesThe definition of interested partyvaries with each section of the 990ssupplemental Schedule L. It canmean

Trustees, directors, officers, key em-ployees (TDOKE) and family mem-bers thereof;

Substantial contributors (which is aterm unique to Schedule L) andfamily members thereof; a substan-tial contributor is anyonewhomadea contribution of $5,000 or moreand is required to be reported onSchedule B;

Grant selection committeemembersand family members thereof; and/or

An entity of which any of the aboveparties owned or controlled 35 per-cent ormore (where themeaning ofcontrol is the same as described inRelated Organizations above).

Schedule L of the 990 reports varioustypes of transactions with interestedparties, including excess benefittransactions, loans, grants or otherassistance, and other business trans-actions. There are various reportingthresholds and exceptions, depend-ing on the type of interested party

and the type of transaction. These aredetailed in the instructions to Sched-ule L. Its important to note thatSchedule L reportable transactionscan impact the independence ofboard members (Question 1b on PartVI of the 990).

Here are some examples of transac-tions that may be reportable onSchedule L, if specific reporting thres-holds are met

A family member of a director is anemployee of the NFP;

The spouse or child of a current orformer director or officer is a part-ner in a law firm to whom the NFPmakes payments for services; and/or

The NFP utilizes a managementcompany to whom they pay a man-agement fee; and the owner of themanagement company serves as ex-ecutive director of the NFP.

Identifying Relatedand Interested PartiesThe IRS requires reasonable effortof your organization to gather in-formation required on related andinterested parties. An annual ques-tionnaire distributed to each TDOKEthat addresses the issues of relation-ships and transactions would be con-sidered reasonable effort.

The instructions for both Schedule Land Schedule R provide all the detailsneeded to identify and determineyour NFPs related and interested par-ties. The tax professionals at UHY arealso a resource to help you throughthis complex information.

ing Issues Task Force, and the re-cently formed Private CompanyCouncil (PCC)to specify thescope and effect of future ac-counting pronouncements. In par-ticular, the definition will be usedto delineate all entities that areoutside the scope of the PCCspublication, Private Company De-cision-Making Framework: AGuide for Evaluating Financial Ac-counting and Reporting for Pri-vate Companies. The PCC has beenchargedwith developing account-ing alternatives within U.S. GAAPthat would be appropriate to pri-vate companies. FASB approval ofthese alternatives is required.

In its Basis for Conclusions sec-tion of ASU 2013-12, the FASBnotes that it considered distin-guishing between NFPs on the ba-sis of (a) whether the NFP issues oris an obligor for conduit debt se-curities that are traded in a publicmarket, (b) whether it receivespublic donations, or (c) some sizethreshold. The board decided thatthese criteria may not be appro-priate in all circumstances andmay create an ineffective brightline among NFPs.

Instead, the FASB agreed that itwill consider on a standard-by-standard basis, whether all, none,or only some NFPs should be per-mitted to apply accounting and re-porting alternatives in U.S. GAAPintended to limit the cost of com-pliance for certain entities. TheFASB will base its decisions on NFPentity user needs and resources.

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